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Monster Energy Co. v. City Beverages, LLC

United States Court of Appeals, Ninth Circuit

October 22, 2019

Monster Energy Company, FKA Hansen Beverage Company, Petitioner-Appellee,
v.
City Beverages, LLC, DBA Olympic Eagle Distributing, Respondent-Appellant.

          Argued and Submitted July 12, 2019 Pasadena, California

          Appeal from the United States District Court for the Central District of California R. Gary Klausner, District Judge, Presiding D.C. No. 5:17-cv-00295-RGK-KK

          Michael K. Vaska (argued), Rylan L.S. Weythman, and Devra R. Cohen, Foster Pepper PLLC, Seattle, Washington; Jonathan Solish and David A. Harford, Bryan Cave LLP, Irvine, California; for Respondent-Appellant.

          Tanya M. Schierling (argued), Norman L. Smith, and Daniel E. Gardenswartz, Solomon Ward Seidenwurm & Smith LLP, San Diego, California, for Petitioner-Appellee.

          Michael D. Madigan and Brandt F. Erwin, Madigan Dahl & Harlan P.A., Minneapolis, Minnesota, for Amicus Curiae National Beer Wholesalers Association.

          Before: MILAN D. SMITH, JR. and MICHELLE T. FRIEDLAND, Circuit Judges, and MICHAEL H. SIMON, [*] District Judge.

         SUMMARY [**]

         Arbitration

         The panel reversed the district court, vacated a final arbitration award between Monster Energy Co. and City Beverages LLC, doing business as Olympic Eagle Distributing, and vacated the district court's award of post-arbitration fees to Monster Energy Co. for its petition to confirm the award.

         After Monster exercised its contractual right to terminate a distribution agreement, the parties proceeded to arbitration to determine whether Olympic Eagle was entitled to protection under Washington law, and thus whether Monster had improperly terminated the agreement without good cause. The parties chose an arbitrator from a list of several neutrals provided by JAMS, the arbitration organization specified in the agreement. At the outset of arbitration, the arbitrator provided a series of disclosure statements and in the final arbitration award, determined that Olympic Eagle did not qualify for protection under Washington law. Olympic Eagle sought to vacate the award based on later-discovered information that the arbitrator was a co-owner of JAMS-a fact that he did not disclose prior to arbitration.

         The panel first rejected the claim that Olympic Eagle waived its evident partiality claim because it failed to timely object when it first learned of potential bias on the part of the arbitrator. The panel held that because Olympic Eagle did not have constructive notice of the arbitrator's potential non-neutrality, it did not waive its evident partiality claim.

         The panel held that before an arbitrator is officially engaged to perform an arbitration, to ensure that the parties' acceptance of the arbitrator is informed, arbitrators must disclose their ownership interests, if any, in the arbitration organizations with whom they are affiliated in connection with the proposed arbitration, and those organizations' nontrivial business dealings with the parties to the arbitration. In this case, the arbitrator's failure to disclose his ownership interest in JAMS, coupled with the fact that JAMS has administered 97 arbitrations for Monster over the past five years, created a reasonable impression of bias and supported vacatur of the arbitration award. Because the panel vacated the arbitration award, the panel also vacated the district court's award of post-arbitration fees to Monster.

         Dissenting, Judge Friedland disagreed that, in an evaluation of whether the arbitrator might favor Monster, the additional information the majority believed should have been disclosed would have made any material difference. She would therefore reject Olympic Eagle's effort to vacate the arbitration award in Monster's favor.

          OPINION

          SMITH, CIRCUIT JUDGE

         City Beverages, LLC, doing business as Olympic Eagle Distributing (Olympic Eagle), and Monster Energy Co. (Monster) signed an agreement providing exclusive distribution rights for Monster's products to Olympic Eagle for a fixed term in a specified territory. After Monster exercised its contractual right to terminate the agreement, the parties proceeded to arbitration to determine whether Olympic Eagle was entitled to protection under Washington law, and thus whether Monster had improperly terminated the agreement without good cause. From a list of several neutrals provided by JAMS, the arbitration organization specified in the agreement, the parties chose the Honorable John W. Kennedy, Jr. (Ret.) (the Arbitrator). At the outset of arbitration, the Arbitrator provided a series of disclosure statements. In the final arbitration award (the Award), the Arbitrator determined that Olympic Eagle did not qualify for protection under Washington law.

         The parties filed cross-petitions in the district court, with Monster seeking to confirm the Award and Olympic Eagle moving to vacate it. The district court ultimately confirmed the Award.

         We conclude, given the Arbitrator's failure to disclose his ownership interest in JAMS, coupled with the fact that JAMS has administered 97 arbitrations for Monster over the past five years, that vacatur of the Award is necessary on the ground of evident partiality. We therefore reverse the district court and vacate the Award. We also vacate the district court's award of post-arbitration fees to Monster for its petition to confirm the Award.

         FACTUAL AND PROCEDURAL BACKGROUND

         I. Factual Background

         In 2006, Olympic Eagle, an Anheuser-Busch (AB) distributor, agreed to promote and sell Monster energy drinks for twenty years in an exclusive territory. The contract permitted Monster to terminate the agreement without cause upon payment of a severance fee. Eight years later, Monster exercised its termination right and offered to pay Olympic Eagle the contractual severance of $2.5 million.

         In response, Olympic Eagle invoked Washington's Franchise Investment Protection Act (FIPA), which prohibits termination of a franchise contract absent good cause. See Wash. Rev. Code § 19.100.180(2)(j). Monster served an arbitration demand on Olympic Eagle and filed an action in the district court seeking to compel arbitration. The district court ruled in favor of Monster and compelled arbitration before JAMS Orange County, as specified by Monster in its form agreement with the AB distributors.

         JAMS provided a list of seven neutrals to conduct the arbitration, and the parties chose the Arbitrator. The Arbitrator's multi-page disclosure statement, provided to the parties at the commencement of arbitration, contained the following provision:

I practice in association with JAMS. Each JAMS neutral, including me, has an economic interest in the overall financial success of JAMS. In addition, because of the nature and size of JAMS, the parties should assume that one or more of the other neutrals who practice with JAMS has participated in an arbitration, mediation or other dispute resolution proceeding with the parties, counsel or insurers in this case and may do so in the future.

         II. Procedural Background

         Following two weeks of hearings, the Arbitrator issued an interim award, finding that Olympic Eagle was not entitled to protection under FIPA. Two months later, the Arbitrator awarded Monster attorneys' fees (together with the interim award, the Award).

         Thereafter, Monster filed a petition in the district court to confirm the Award, and Olympic Eagle cross-petitioned for its vacatur. Olympic Eagle sought to vacate the Award based on later-discovered information that the Arbitrator was a co-owner of JAMS-a fact that he did not disclose prior to arbitration. Olympic Eagle also requested information from JAMS regarding the Arbitrator's financial interest in JAMS, and Monster's relationship with JAMS. When JAMS refused to divulge this information, Olympic Eagle served JAMS with a subpoena. In the face of further resistance, Olympic Eagle later moved to compel JAMS's response to the subpoena.

         Ultimately, the district court confirmed the Award, denying Olympic Eagle's cross-petition and finding its motion to compel moot. The district court then awarded Monster attorneys' fees from both the arbitration and the post-arbitration ...


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